Laying the Groundwork for BC LNG Exports to Asia

74 Pages·2012·1.84 MB·English

by  Gerry Angevine

Studies in
ENERGY POLICY
October 2012
Laying the Groundwork
for BC LNG Exports to Asia
by Gerry Angevine and Vanadis Oviedo
Key findings
Enormous quantities of natural gas have been identified in tight sand and
shale formations in northeast British Columbia during the past decade.
The potential supply of recoverable, marketable gas is much greater than
western Canadian requirements. Further, opportunities for Canadian gas
exports to the United States are shrinking.
Demand for liquefied natural gas (LNG) is increasing rapidly in Japan,
South Korea, Taiwan, China, and other countries in the Asia-Pacific region
where it can be sold at a premium compared to the Canadian price of gas.
This represents a substantial window of opportunity for British Columbia
LNG project developers, but they must act quickly because of competition
from Australian, US, and Middle Eastern LNG suppliers.
Construction and operation of natural pipelines from northeast
British Columbia to Kitimat and other west-coast ports, and of the gas
liquefaction and terminal facilities, together with the greatly expanded
natural gas production would contribute very significantly to employment,
labour income, and GDP in British Columbia and the rest of Canada.
The BC government recognizes the economic benefits that would accrue
from exporting LNG and issued an LNG strategy document in February
2012. However, existing outdated regulatory processes and procedures,
unnecessary duplication of federal and provincial government project
reviews, and an unwieldy environmental review process could impede
the timely development of a Canadian LNG export industry. If the federal
and BC governments believe it is important to secure a niche for British
Columbia’s gas resources in the Asia-Pacific market, they should consider
introducing reforms to streamline the regulatory approval process and
thereby expedite development.

Studies in
Energy Policy
October 2012
Laying the Groundwork for
BC LNG Exports to Asia
by Gerry Angevine and Vanadis Oviedo
www.fraserinstitute.org / Fraser Institute
Summary
British Columbia could benefit greatly by exporting liquified natural gas (LNG) to
the Asia-Pacific Region. However, opposition by special-interest groups, out-dated,
cumbersome, and overlapping regulations, along with other non-market factors,
are inhibiting the development of the pipelines and terminal facilities required to
ship LNG from Canada’s west coast to Japan, Korea, China, India, and other Asian
countries.
This study estimates the economic opportunities for British Columbia that
would flow from exports of liquified natural gas to Asian and Pacific markets,
and explores how existing obstacles to infrastructure development could be
overcome, to enable Canada to take full advantage of opportunities to develop
important alternative markets for natural gas.
Fraser Institute / www.fraserinstitute.org
Contents
Overview / iii
Introduction / 1
Production, reserves, and exports of natural gas in British Columbia / 3
Prospects for natural gas demand in the Asia-Pacific region / 12
The opportunity cost of confining gas exports to US markets / 16
Gross economic impacts from access to Asia-Pacific LNG markets / 20
Obstacles to LNG exports from British Columbia / 31
Policy options / 43
References / 50
About the authors / 57
Publishing information / 58
Supporting the Fraser Institute / 59
Purpose, funding, & independence / 60
About the Fraser Institute / 61
Editorial Advisory Board / 62
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Overview
Use of Liquified Natural Gas (LNG) has been growing rapidly in the Asia-Pacific
region, mainly as an energy source for electric generation but also for distri-
bution to residential, commercial, and industrial consumers. Growth in LNG
use has been strongest in Japan, Korea, and Taiwan, which together accounted
for 86% of Asia-Pacific LNG trade in 2009. China and India, which are also
becoming important LNG markets, represented 13% of LNG trade in the region
in 2009 but are expected to account for an even greater share in coming years.
LNG prices in the Asia Pacific region are generally indexed to the Japan
Customs Cleared price for crude oil imports, which closely follows the price
of Brent (North Sea) crude oil. Because LNG prices there are approximately
90% of the oil price on an equivalent-heating-value basis, they are consider-
ably higher than North American gas prices. LNG exports to Asia would allow
Canadian gas producers to benefit from this price differential.
Until now, Canadian gas producers have only exported gas via pipe-
line to markets in the United States. However, it is becoming difficult to
maintain (let alone grow) export volumes to the United States because US
gas production has increased remarkably as the result of technologies that
have made development of tight gas and shale gas resources commercially
viable.1 Moreover, this increase in the United States’ domestic supply of gas
has reduced gas prices and, similarly, netbacks to producers exporting gas
to the United States.
Fortunately, Canadian gas producers have an opportunity to develop
markets in Asia where buyers are seeking stable, long-term LNG purchase
agreements with reliable gas producers in politically stable countries such
as Canada.
However, a variety of policies stand to impede development of the
infrastructure that will be required to export liquefied natural gas (LNG) to
1 Gas that is embedded in tight sand formations is often referred to simply as “tight gas.”
Natural gas locked in rock shale formations is typically known as “shale gas.” The pres-
ence of natural gas in shale formations has been known for many years but only recently,
with the development of horizontal drilling and hydraulic fracturing technologies, has
production become feasible.
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iv / Laying the Groundwork for BC LNG Exports to Asia
markets in the Asia-Pacific region via British Columbian ports. Most of the
natural gas supplies are expected to come from northeast British Columbia,
which has an immense amount of tight and shale gas resources. However,
some of the gas could eventually also be brought from northwest Alberta,
the southeast corner of Yukon, and other regions.
To assess the economic impacts from exporting LNG to markets in the
Asia-Pacific region, we developed a development scenario compatible with
the National Energy Board’s most recent long-term forecast of BC natural gas
production. In our development scenario, LNG exports reach 7.1 billion cubic
feet per day (Bcf/day) by 2032. This assumes that the Kitimat LNG Inc. and
the BC LNG Export Co-operative projects (both of which have been granted
export licenses by the National Energy Board) proceed. It also assumes that
LNG Canada, an LNG export facility proposed by Royal Dutch Shell, and its
Korea Gas Corporation, Mitsubishi Corporation, and PetroChina Investment
(PetroChina) partners, will be developed, along with two additional facilities
(unidentified) that we have labeled “Project A” and “Project B.” 2
Pipelines must be built to transport natural gas to the LNG export
terminals. We anticipate that the proposed Pacific Trail Pipeline will be con-
structed to support the Kitimat LNG project and that Pacific Northern Gas
Ltd.’s current capacity will be expanded to aid transport of gas to the BC
LNG Export Co-operative facility. In addition, we assume that the proposed
Coastal GasLink Pipeline will be built (and later expanded) to transport gas
to the LNG Canada facility and that two other pipelines will be constructed
to supply the Project A and Project B LNG export facilities.
Building pipelines to transport natural gas from northeast British
Columbia to the west coast for export to the Asia-Pacific region will bring
substantial direct and indirect economic benefits. The construction of new
gas pipelines is estimated to contribute approximately $4 billion to Canadian
GDP and at least 45,000 job-years of employment.3 The construction of LNG
liquefaction and terminal facilities is estimated to create another 8,350 job
years. In addition, operation of the natural gas liquefaction terminals and
new and expanded pipelines will generate considerable full-time employment.
In addition to the contributions to employment and GDP from LNG
exports, Canada would benefit from the increased netbacks to natural
gas producers. According to the Asian LNG export scenario that we have
2 On June 28, 2012, Progress Energy Resources Corp. indicated that the company had
received a purchase offer from Petronas Inc. of Malaysia and anticipates shipments from
its BC LNG export project to commence by 2018 (Progress Energy, 2012). This and the
September 2012 announcement by BG Group PLC that it is considering building a large
LNG export facility at Prince Rupert could result in more rapid, and possibly greater,
development than we assumed (Healing, 2012, September 10).
3 One job-year is equal to 1,960 hours (40 hours per week, 49 weeks per year).
Fraser Institute / www.fraserinstitute.org
Laying the Groundwork for BC LNG Exports to Asia / v
outlined, these could exceed $134 billion 2010 dollars over the period from
2014 to 2035. LNG export facility development in excess of the projects
and capacities that we have assumed would, of course, increase all of these
benefits accordingly.
Unfortunately, cumbersome regulatory processes and procedures, oppos-
ition by some First Nations and special-interest groups, conflicting toll-setting
methodologies, and often unwarranted environmental concerns and review
processes are inhibiting the development of the transportation infrastructure
needed to ship natural gas to the west coast. With development constrained
and slowed by obstacles, much natural gas production growth will be foregone,
and with it, considerable growth in GDP, labor income and employment.
If Canadians wish to reap the benefits that would accrue from timely
development of British Columbia’s vast tight and shale gas resources, policy
reforms that reduce impediments to infrastructure development are essen-
tial. Removing obstacles also means considering the benefits from updating
essential regulatory processes, including those required under the National
Energy Board Act, to meet the needs of the twenty-first century. Applicable
legislation and regulations governing energy project regulation may need to
be reformed to ensure that, going forward, project applications can be dealt
with objectively and within reasonable time periods. Clearly, repetition of the
regulatory delays and economic costs witnessed in the case of the Mackenzie
Gas project4 and presently unfolding in the case of the Enbridge Northern
Gateway5 project needs to be avoided.
In particular, the authors suggest federal and provincial governments
expedite development of the infrastructure that is needed to gain access to
LNG markets in the Asia-Pacific region with legal and regulatory reforms and
measures, and innovative approaches such as the following.
4 The Mackenzie Gas project involves the construction of gathering pipelines, process-
ing facilities, and a major gas-transmission pipeline to transport natural gas from the
Mackenzie Delta to Alberta to connect with the system of Nova Gas Transmission Ltd.
The project was first proposed in the early 1970s but shelved due to Aboriginal land claims
and environmental concerns. It was resurrected in 2004 when a new proposal was filed
with the National Energy Board. That proposal was approved, with numerous conditions
attached, in December 2010.
5 The proposed Enbridge Northern Gateway project would involve constructing twin pipe-
lines from Bruderheim, Alberta, to Kitimat, British Columbia, and a marine terminal with
storage capacity in Kitimat. The eastbound pipeline would transport to Alberta natural
gas condensate (pentanes plus) that is used to reduce the viscosity of bitumen and heavy
crude oil so that it may be more readily transported via pipeline. The westbound pipeline
would transport crude oil, bitumen, and synthetic crude oil to a new marine terminal
in Kitimat, where it would be shipped to Asian markets. Some First Nations groups and
environmentalist groups are opposing the project before the National Energy Board on
environmental, social, and cultural grounds. A decision is not expected before 2014.
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vi / Laying the Groundwork for BC LNG Exports to Asia
1 Restrict the scope of the National Energy Board to matters necessary to
protect the public interest such as construction and operational standards
and efficiency, property rights and claims, and environmental impacts.
2 Limit the number of registered interveners at public hearings to prevent
special-interest groups from “owning the mic” and prolonging the process.
3 Place shorter, more clearly defined and binding limits on the time
regulators and the responsible elected officials may take to review energy
project applications and reach decisions.
4 Convene generic National Energy Board hearings if two or more similar
project applications are likely to be brought forward during the next 10 to
20 years.
5 Involve federal and provincial government and First Nations organizations
with industry representatives to identify and approve transportation
corridors to be used for infrastructure development.
6 Require a single construction application where an export terminal, facility,
and a new pipeline are being proposed by the same investors.
7 Remove inconsistencies in the methodologies used to determine tolls on
federally-regulated natural gas pipelines.
8 Deal with First Nations’ environmental concerns under and in accordance
with the Canadian Environmental Assessment Act.
9 Promulgate federal legislation and regulations to provide for mandatory
settlement mechanisms to resolve compensation issues disputes with First
Nations groups if and as required.
10 Encourage discussions between project proponents and First Nations well
before applications are filed with the National Energy Board, a Joint Review
Panel and/or other government agencies.
11 Require operators of natural gas pipelines to undertake risk assessments
in relation to “high consequence areas” as part of their integrated
management plans and to ensure pipelines are not operated at greater than
approved pressure levels.
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